Meta Earnings To Show Zero Sales Growth As Ad Market Plummets

It's hard to feel optimistic ahead of Meta Platforms' (NASDAQ:META) earnings report when the company's main business and profit engine—advertising revenue—appears to be losing momentum.

Research firm Magna estimates that the US digital ad market expanded just 11% in the second quarter, a sharp decline from a 58% increase in the same period a year earlier, as advertisers brace for a potential economic downturn and cut their ad spending.

Meta also faces other headwinds. The video-sharing app TikTok, owned by China's ByteDance Ltd., is providing serious competition and making it tougher to attract young users.

All this is happening at a time when changes to data-collection rules on Apple's (NASDAQ:AAPL) iPhones have hindered Meta's ability to serve users targeted ads. During last quarter's earnings call, Meta executives said the privacy changes would reduce the company's 2022 sales by $10 billion.

Amid these challenges, the social media giant should report its first period of zero sales growth since the company's initial public offering a decade ago, along with a 33% decrease in net income.

Shares of the Menlo Park, California-based company have been among the worst performers on the tech-heavy NASDAQ 100 this year, losing about $500 billion in market capitalization since its September peak.

Time To Buy?

For most analysts surveyed by Investing.com, the current setup is a signal to dive in and scoop up Meta shares. The company now trades at just 14 times estimated earnings. By comparison, the average valuation in the NASDAQ 100 Index is around 25 times earnings. That's never happened before in Meta's tenure as a listed company.

Source: Investing.com

Accordingly, the InvestingPro fair value model for the stock implies a nearly 62% upside potential from current price levels.

Source: InvestingPro

In a recent note, Morgan Stanley said it sees "less revision risk" in Meta earnings than other big tech names. The firm has a $280 price target for Meta, which implies a 70% upside potential. Despite this buy-on-the-dip urge, we caution investors that CEO Mark Zuckerberg and his team have a challenging road ahead to put the company back on a growth trajectory, and it's better to stay on the sidelines.

The most significant headwind the company currently faces comes from escalating challenges at its core business, including heightened competition, a hostile regulatory environment, and advertiser reluctance to spend big when the economy looks to be entering a tough patch.

In addition, there is a lack of visibility on Zuckerberg's Metaverse shift. We don't know how long it will take for this massive undertaking to pay off. Meta's Reality Labs, which is giving shape to the company's Metaverse ambitions, lost $10.2 billion in 2021.

While downgrading shares of Meta to underperform from hold, Needham analysts said the company's heavy investments in the Metaverse could take too long to pay off. The note said:

"Near-term, we worry that consensus estimates are too high, based on Meta's promises of higher investments in the Metaverse at the same time it is purposely slowing its revenue growth to better compete with TikTok.

We worry that Meta's enormous spending to create a new world called the Metaverse suggests it fears existential risks to its historical collection of businesses."

Bottom Line

Meta, in our view, has lost its growth momentum, and there is little visibility about the future, especially when the company is changing its direction and investing heavily in its Metaverse venture. This bet could pay off in the long run, but it doesn't make the stock a compelling investment case at the moment.

Disclosure: The writer doesn't own shares of Meta.

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